real estate 2009 - international financial reporting standards in real estate

8/12/2019 Real Estate 2009 - International Financial Reporting Standards in Real Estate

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3 4 Z E L L / L U R I E R E A L E S T A T E C E N T E R

O N N O V E M B E R 1 4 , 2 0 0 8 , theSEC issued its long-awaited proposedInternational Financial Reporting Standards (IFRS) roadmap outlining milestones that, if achieved, could lead tomandatory transition to IFRS by U.S.issuers starting in fiscal years ending on orafter December 15, 2014. The roadmapalso contains proposed rule changes that would give certain U.S. issuers the early option to use IFRS in financial statementsfor fiscal years ending on or afterDecember 15, 2009.

According to the SEC, the use of a single, widely accepted set of high-quality accounting standards would benefit boththe global capital markets and U.S.

International FinancialReporting Standardsin Real Estate

Explaining the intricacies

of IFRS.

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investors by providing a common basis forinvestors, issuers and others to evaluateinvestment opportunities and prospects in

different jurisdictions. The SEC alsonotes that IFRS has the potential to bestprovide the common platform on whichcompanies can report and investors cancompare financial information.

A number of characteristics of the realestate industry make it a prime candidate

for early conversion to IFRS. MajorREITs, real estate private equity firms,owners and operators, and corporate realestate divisions often have operations andassets that span several countries and con-tinents. Accounting and financial report-ing provides a vital link between real estate

companies and their capital providers. Inthe United States, some real estate entities,such as public REITs, report on a histori-cal cost model under U.S. generally

accepted accounting principles (GAAP), while other real estate entities, such asinvestment companies, and real estate

funds owned primarily by institutionalinvestors, such as pension plans, report ona fair value model, also under U.S. GAAP.Real estate investors are looking for moreconsistency and comparable informationin financial reporting from real estate com-panies, which IFRS can provide.

Recent events suggest that reporting under IFRS will be allowed or required formost public companies in the UnitedStates and around the globe within thenext few years. The proposed roadmaphighlights seven milestones. Milestones 1through 4 discuss issues that need to be

addressed before mandatory adoption of IFRS and Milestones 5 through 7 discussthe transition plan for the mandatory useof IFRS.

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Figure 1: SECs proposed roadmapTimeline for adoption of IFRS by U.S. issuers

Period in whichmilestones 1-4will be evaluated.

SEC to decide whether tomandate use of IFRSs for allU.S. issuers on the basis of the progress of milestones1-4 (milestone 6).

Non-accelerated filerscould be required to make the transition to IFRSs forfiscal years ending on orafter December 15, 2016(milestone 7).

Large acceleratedfilers could berequired to make the transition toIFRSs for fiscal yearending on or afterDecember 15, 2014(milestone 7).

Accelerate filerscould be required to make the transition to IFRSsfor fiscal yearsending on or afterDecember 15, 2015(milestone 7).

2008 2009 2010 2011 2012 2013 2014 2015 2016

Certain U.S. issuersmay begin using IFRSsfor fiscal years endingon or after December15, 2009 (milestone 5).


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Under the proposed roadmap (Figure1), U.S. issuers that meet both of the fol-lowing criteria would be eligible to use

IFRS in financial statements for fiscal yearsending on or after December 15, 2009.First, the U.S. issuer must be globally among the 20 largest listed companies worldwide in its industry, as measured by market capitalization. Second, IFRS, asissued by the International Accounting

Standards Board (IASB), must be used asthe basis for financial reporting more oftenthan any other basis of accounting by the20 largest listed companies worldwide inthe U.S. issuers industry, as measured by market capitalization.

U.S. issuers electing to file IFRS

financial statements with the SEC wouldbe required first to do so in an annualreport and would not be able to file IFRSfinancial statements with the SEC for thefirst time in a quarterly report, registra-tion statement, or proxy or informationstatement. The American Institute of Certified Public Accountants (AICPA)has not yet provided its roadmap or guid-ance for IFRS adoption for non-publiccompanies, but has expressed its supportfor the SECs proposed roadmap andtimeline.

The SECs proposed timeline doesnot provide a lot of breathing room. A conversion effort that is both sane andsuccessful will require a lengthy runway.In mid-2008, the AICPA announced

that it considered a three-to-five-yeartimeline to be reasonable for transitionto IFRS.

C H A L L E N G E S A N D

O P P O R T U N I T I E S

An IFRS conversion is not primarily anexercise in reshuffling the chart of

accounts, nor is it principally a technicalaccounting and financial reporting matter.In fact, companies are likely to spend sig-nificant amounts of time addressing con-cerns regarding tax, valuation, treasury,legal, people, technology, and communica-tions. Clearly, a great deal of work lies

ahead. Yet, despite these challenges, thebenefits of reporting under IFRS may out- weigh the costs.

Companies with global operations orproperties usually grapple with numerousstatutory reporting requirements underdifferent accounting standards in eachcountry. In such cases, there are significantbenefits that can be gained from transi-tioning the financial reporting of all globalsubsidiaries and affiliates to IFRSincluding potential for reduced lead timein preparing consolidated financial state-ments, reduced consolidation issues,improved internal controls, reduced per-sonnel costs, and a centralized approach toaddressing statutory reporting issues.Transitioning to a uniform set of standards



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carries the possibility of enhancing share-holder value.

Conversion provides a fresh look at

current practices. If the financial closeprocess includes reconciling multipleaccounting standards and dealing with a variety of sub-ledgers, manual adjust-ments, data hand-offs, and accounting overrides, IFRS adoption provides anopportunity for a fresh look at these

processes and elimination of steps requiredto close the books.

Conversion can be a catalyst forstreamlining and consolidation. As a com-pany expands through growth and acquisi-tions, information technology systemsmay become increasingly convoluted.

Many companies operate a patchwork of legacy accounting and enterprise resourceplanning systems across geographies andbusiness units, leading to error-proneadjustments and reconciliations. Moving to IFRS provides a chance to streamlineand consolidate these disparate systems.

IFRS offers an opportunity to useprinciples-based accounting. Many finance professionals have becomeincreasingly frustrated with U.S. GAAPsand its voluminous rules for dealing withaccounting issues. For a decade or more,many CFOs and other finance executiveshave openly pined for principles-basedaccounting to help clarify and improvethe reliability of financial reporting.IFRS answers that wish.

IFRS helps open the doors of the glob-al marketplace. Adopting IFRS may improve access to foreign capital markets

by giving foreign investors greater insightinto a companys financial performance.Such investors may be more comfortable with, or have more confidence in, a glob-ally accepted set of accounting standards.Companies themselves can also benefitfrom an improved ability to benchmark

with peers and competitors.

T H E I M P L E M E N T A T I O N

P L A N

Development of an IFRS implementation

plan is an important first step. Throughthis effort, companies can chart an optimalcourse, determine the pace of the conver-sion process, and possibly skirt somedetours and potholes.

To start, consider gathering answers toa few preliminary questions: Have currentIFRS reporting requirements, if any, beeninventoried? How many local generally accepted accounting principles does thecompany currently report under? How many business units already prepare IFRSfinancial statements? How might access tocapital be affected by an IFRS conversion?How many competitors have converted? Isthere an expectation that they wouldswitch to IFRS, if given the choice, in theUnited States? Is there a major enterprise

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resource planning or finance transforma-tion project in the works? Is the company involved in, or considering, a major

acquisition? What is the level of IFRSknowledge within the company, bothdomestically and globally? What wouldbe the effect of a possible IFRS require-ment in the United States on the compa-ny? What are the costs and benefits of adopting IFRS?

Given the far-reaching scope of IFRS,the process may assess the potential impacton each department in the organization,including finance, human resources, tax,legal, information technology, andinvestor relations. Other stakeholders may also be involved, including the board,

audit committee, shareholders, and exter-nal auditor.By estimating costs, benefits, and tim-

ing up front, management can avoid therushed approach, and unnecessary expense, that sometimes characterized ini-tiatives such as the Sarbanes-Oxley Act andthe Year 2000 efforts. A carefully designedroadmap will likely empower a company to convert on its own terms. By taking a measured and informed approach, man-agement improves the likelihood of identi-fying value in an exercise that otherwisemay be reactive and solely compliance-driven. The value may show itself in theform of reduced costs of implementation,standardization and centralization of statu-tory reporting activities, enhanced controls

over recording of operations of foreignsubsidiaries and affiliates, greater standard-ization of accounting policy application,

faster close processes, and possibly corefinance transformation.

T H E E U R O P E A N

E X P E R I E N C E

In July 2002, the European Parliamentpassed legislation requiring listed compa-nies to convert to IFRS by 2005. The shorttimeframe and extensive reach of the direc-tive had many companies scrambling tocomply and placed significant resourcepressurehuman and financialon

finance teams and their companies. A tangible measurement of the effortcan be found by comparing Europeancompanies 2004 local GAAP and 2005IFRS financial statements. The latter aver-aged more than 50 percent more volumi-nous than the former; in some instances,reports doubled in length. Much of theincrease can be attributed to an increasedlevel of IFRS disclosure requirements inthe financial statements in areas such as judgments made and assumptions used.Certain accounting issues proved especial-ly vexing during the transition, including asset impairments, financial instruments,lease accounting, and componentization.

There are many lessons learned fromthe European experience. First, the effort



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was often underestimated. The originalperception that conversion was solely anaccounting issue was replaced with a grow-

ing realization that the initiative was muchbroader, larger, and more complex. Andconversion projects often lacked a holisticapproach because companies took such a limited view of the conversion process.Companies frequently did not take thecollateral effects into consideration, such as

the impacts on information technology,human resources, and tax.

A late start often resulted in an escala-tion of costs. Those few companies thatanticipated conversion and took steps toprepare for it were in much better shapethan those that did not. Companies that

delayed their response paid a price for it, interms of higher costs and greater diversionof resources.

Many companies did not achieve a business as usual state for IFRSreporting. The highest quality financialdata and most efficient processes areobtained when a company fully inte-grates IFRS into its systems and process-es. The compressed timeframes preclud-ed this possibility; instead, first-yearfinancials, and in some cases ongoing financial reporting, were often pro-duced using extraordinary, labor-inten-sive, and unsustainable measures.

Several European companies are only now starting to attain benefits from IFRSimplementation. Due to multiple con-

straints, the first-year effort in the EU wasfocused more on getting it done.Potential benefits in terms of reducing

complexity, increasing efficiency, decreas-ing costs, and improving transparency hadto be deferred.

M O R E T H A N A C C O U N T I N G

A N D F I N A N C I A L R E P O R T I N G

The impact of IFRS on the general ledgerand the financials can be substantial, butin a relative sense, the accounting may bethe easy part. How the non-financialaspects of the conversion are handled may be a more accurate indicator of success.

Among the areas warranting attention arehuman resources, legal, mergers and acqui-sitions, valuation, tax, treasury, and infor-mation technology.

With respect to human resources,IFRS will likely influence hiring, training,compensation, and termination practices.Consider hiring. How many finance staff are currently versed in IFRS? If that infor-mation isnt available, consider adding a personnel inventory to the IFRS work plan. Assuming a talent shortfall, the gap will need to be closed. Most U.S. college-level accounting programs are only now getting their IFRS curriculum estab-lished. If a company cannot recruit in suf-ficient numbers, it should consider train-ing existing staff.


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Compensation is another area forreview. Some real estate companies pay commissions or bonuses based on sales or

rental revenue. But revenue recognitionrules differ between IFRS and U.S. GAAP,meaning that sales or rental revenuesunder one standard might be treateddifferently under the other. Also, someincentive-driven compensationmaybe basedon net asset value, which may differ between

U.S. GAAP and IFRS. Additionally, many real estate companies calculate bonuses fortop executives based on profits or metricsrelevant under U.S. GAAP, such as fundsfrom operations. In many cases, reporting under IFRS will change that bottom line.Funds from operations is a measurement

that lacks relevance under IFRS. Executivecompensation plan revisions may berequired to smooth out the differences.

For mergers and acquisitions, imple-mentation of a single set of accounting standards for all properties, subsidiaries,and joint ventures around the world willallow for streamlined integration of new acquisitions into a companys consolidat-ed financial reporting system. Also, thetransparency resulting from fair valuereporting of investment properties may affect strategic business decisions aroundacquisitions and dispositions based ontheir likely impact on financial state-ments under IFRS.

From a tax perspective, adoption of IFRS may also result in changes in profit

recognition and ultimately pre-tax income. These changes will likely requireevaluating their impact on the deferred

taxes recorded, the timing of reversals of deferred items, and valuation allowances.It is important to acknowledge thesechanges and understand that the book rev-enue/expense recognition policies may allneed to be reviewed to get them right. Ascertain foreign jurisdictions require taxes

to be paid based on earnings reported inthe financial statements, the changes to netearnings due to an IFRS adoption may result in significant fluctuationsincreas-es or decreasesin the foreign taxes owed.This is an area that management would beexpected to carefully evaluate as an IFRS

adoption is considered. Additionally, themany changes to the financial reporting of assets, liabilities, profits, and losses may result in significant impacts on compliance with regulatory requirementsparticularly for REITs.

Measurements of fair value weave their way through IFRS, including accounting for acquisitions, investment property reporting, and accounting for financialinstruments. Estimating, supporting, doc-umenting, and reporting fair-valuerequires a thoughtful process and the allo-cation of appropriate resources to managethis important aspect of IFRS. Severalareas related to fair value estimates may beconsidered, including the use of qualifiedspecialists; the determination of proper



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extent and frequency; careful scoping of the analysis and report; and the develop-ment of a detailed policy or standard. Fair-

value disclosures in financial statements will likely vary in detail; however, they should include information on valuationmethods, assumptions, qualification of thevaluation specialist, and explanations of fair-value conclusions.

Moving to a global financial reporting

model may open up access to new sourcesof capital. Many global lenders, globalprivate-equity firms, and internationalexchanges require or prefer IFRS reporting due, in part, to its increased transparency into fair values and comparability to otherinvestments or companies. Thus, these

sources potentially become new avenuesfor capital funding, particularly in the cur-rent U.S. capital markets environment.Note, however, that greater use of fairvalue of underlying investment propertiesmay create more volatility in a companysaccess to capital. That is, not only canreporting under IFRS potentially open upaccess to additional capital in a favorablefair-value environment, but it can alsoserve to limit the availability of additionalcapital in an unfavorable fair-value envi-ronment. Furthermore, with reporting ordisclosure of the fair values of investmentproperties, management will likely need tounderstand, evaluate, and manage theexpected market reactions to reportedvolatility in property values. This will rep-

resent new territory for most U.S. realestate companies.

Expansive real estate holdings equal

extensive information technology (IT)needs. From leasing data to depreciationschedules to tax recordkeeping to record-ing the fair value of investment properties,theres plenty of financial information forreal estate companies to track. The meritsof a single consolidated system to do this

are well known but, unfortunately, not widely practiced. Rather, a patchwork of legacy systems, homegrown programs,stand-alone machines, and inheritedequipment often predominates.Constantly changing portfolios complicatean already far-from-simple picture. In

sum, its a situation calling out for remedy.Fortunately, real estate companies haveheard the call. Many of the industryslargest players are currently planning orengaged in major IT initiatives, consoli-dating disparate systems down to a singleplatform. The benefits in terms of efficien-cy, productivity, security, and complianceare potentially enormous to companies within the industry. However, much of the work may be for naught if IFRS is not fac-tored into the upgrade. Any initiative of such magnitude should not only accom-modate present needs, but must be able toseamlessly handle future needs.

The latest versions of many enterpriseresource planning systems have IFRS capa-bilities, but adopting them is not akin to

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flipping a switch. If IFRS conversion isntplanned for at the earliest stages of theupgrade, companies may end up engaged

in a lengthy and expensive reconfigurationeffort a few years down the road. Even if a major IT overhaul is not in the works, a change in accounting standards will likely require modifications to financial report-ing systems to accommodate informationnot currently required under U.S. GAAP.

It may also be necessary to modify orrework certain business process IT sys-tems, particularly those that are reliedupon to accumulate data and feed into theaccounting and financial systems.

G A A P A N D I F R S

U.S. GAAP and IFRS differ in key ways,including their fundamental premise.Overall, U.S. GAAP is rules-based, where-as IFRS is principles-based. Under U.S.GAAP, voluminous guidance attempts toaddress every conceivable accounting problem that might arise. And if that guid-ance doesnt exist, it is created. AlthoughIFRS is not without its rules, Americanaccountants will have less interpretiveguidance to use under IFRS and conse-quently will be required to use more pro-fessional judgment than they are accus-tomed to.

However, it is not simply the dissimi-larity between a rules-based approach and

a principles-based approach that accountsfor the differences between the two sets of standards. The standards differ on a num-

ber of points and can significantly affect a companys financial results. Although theextent of these differences is dwindling as a result of ongoing convergence projects by U.S. and international standards-setting bodies, significant differences remain inareas such as investment properties, prop-

erty, plant and equipment, leasing, impair-ment, income taxes, and revenue recogni-tion. Also, as IFRS generally allows formore choices than U.S. GAAP, differencesin accounting for similar transactionsunder IFRS may result. This is particular-ly evident in the accounting for invest-

ment properties under IFRS, which allowsthe choice of accounting using historicalcost or fair value. Given that the principles-based approach and more choices may result in differences in accounting for whatappear to be similar transactions, robustdisclosures are required to assist in thecomparability and transparency of thefinancial reporting. Table I details some of the more significant accounting and finan-cial reporting differences between IFRSand U.S GAAP impacting real estate com-panies, and the implications on processesand information technology, as well assome broader considerations and issuesrelated to the differences.

Investment Properties: When real estatecompanies evaluate a potential IFRS adop-



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InvestmentProperties

Property, Plantand Equipment

Impairment

Leases

Sale of RealEstate

Sale-leasebacks

Joint Ventures

Taxes

IFRS gives an option toreport at either fair valueor historical cost withdisclosure of fair values.

IFRS requires compo-nentization approach forsignificant parts of PP&E; revaluation modeloptional.

IFRS has only one-stepimpairment test basedon recoverable amount;IFRS impairment lossesmay be reversed if recovery occurs.

IFRS classification crite-ria contains no brightlines; broader than justland and PP&E

IFRS considers transferof risks and rewardsmodel, but withoutbright lines and littleguidance on continuinginvolvement.

Potential for immediategain recognition for sale-leasebacks that are clas-sified as operating leases.

IFRS recording differsfor jointly controlledassets and operationsvs. jointly controlledentities/ventures.

No specific guidancerelated to uncertain taxpositions in IFRS; IFRSdeferred taxes not

required on certain JVsdomestic undistributedearnings.

Increased need forqualified independentor internal valuations;systems modificationsto track fair valuesnecessary.

Systems modificationsmay be necessary totrack components andseparate depreciationamounts.

Changes in impairmentanalysis and systemmodifications to trackimpairments for futurereversal.

Changes to classifica-tion analysis includingnew data considered.

Changes to sale recog-nition and/or gainrecognition evaluation,including increase inprofessional judgment.

Changes to evaluationof sale-leaseback trans-actions and gain recog-nition.

Systems modificationsto manage differingconsolidation processes.

Tax accounts andprocesses for deferredtaxes and uncertain taxliabilities may change.

May need to manageexternal stakeholder reac-tions to volatility in fairvalues and debt con-venant compliance maybe at risk.

Potential difficulty in tran-sition of existing assetsto componentizationdepending on age of assets and detail informa-

tion available.Increased focus on peri-odic assessments andpossibly increasedvolatility from more fre-quent write-downs andreversals.

Pre-EITF 01-8 contracts(not previously evaluatedas containing leases underU.S. GAAP) will requireevaluation as potentialleases under IFRS.

IFRS changes revenuerecognition for condo-minium unit sales andsimilar transactions.

More sale-leasebacktransactions may qualifyfor removal of the assetfrom the balance sheet

under IFRS.

Proposed IFRS standardlikely to remove propor-tionate consolidationoption; potentially changeevaluation of joint assetsand operations.

Foreign taxes in someforeign jurisdictionsbased on reported earn-ings may change.

Table I: Appropriation of divestment proceeds

POTENTIAL IMPLICATIONSPOTENTIALDIFFERENCES Financial Statements Process/IT Other Issues


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tion, the most significant considerationgenerally will relate to the accounting pol-icy choice regarding recognition of invest-

ment properties, which under IFRS may be reported at either fair value with unre-alized gains and losses reported in earningsor at historical cost. The choice to movefrom the historical cost model under U.S.GAAP to a fair-value model under IFRSmay significantly alter the fundamental

look and feel of a real estate companysfinancial statements. Balance sheets willlikely align more closely with the true eco-nomics of the companys holdings, whileincome statements will include increasedvolatility as a result. Even if the fair-valuereporting option is not elected under

IFRS, the fair values of investment proper-ties must still be disclosed in the footnotesto the financial statements, unless notdeterminable. The vast majority of European real estate companies chose toreport investment properties at fair value.

Property, Plant and Equipment: Themain difference between U.S. GAAP andIFRS in accounting for property, plant andequipment used in the business, asopposed to being held for investment andtherefore considered investment property,is the requirement under IFRS to separateinto components significant parts of realestate and equipment that have differentestimated useful lives. That is, each signif-icant part of an asset with a different use-ful life or depreciation pattern is account-

ed for and depreciated separately. Forexample, a newly acquired building wouldlikely not be recorded as a single asset, but

rather as several component assets such asa building shell, heating system, and roof.The depreciation of the cost of the build-ing is based on the separate estimated livesfor each component, rather than based ona weighted average of the componentslives, which is currently the practice under

U.S. GAAP.Furthermore, IFRS provides compa-

nies a choice of accounting for property,plant and equipment under either the his-torical cost model, which is the requiredmodel under U.S. GAAP, or a revaluationmodel. Although the revaluation model is

not widely used under IFRS, it doesrequire companies to re-measure property,plant and equipment at fair value andrecord the change in value directly to equi-ty. However, under this model, deprecia-tion is recorded from the revalued amount,typically resulting in a higher depreciablebasis and higher depreciation expense.

Leases:There are several key differencesbetween IFRS and U.S. GAAP in the area of lease accounting. IFRS lease accounting standards cover a wider range of transac-tions than under U.S. GAAP. While only property, plant and equipment (landand/or depreciable assets) can be subject toa lease under U.S. GAAP, IFRS coverslease arrangements for all assets, with theexception of certain intangibles. Although



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many of the lease classification criteria aresimilar under IFRS and U.S. GAAP, IFRSdoes not have the bright lines and specific

criteria found in U.S. GAAP lease stan-dards. Additionally, the nomenclature of leases under IFRS and U.S. GAAP differs:IFRS has only operating and financeleases, whereas U.S. GAAP has operating,capital, sales-type, direct financing, andleveraged leases.

Initial adoption: IFRS requires one yearof comparative financial information to bereported under IFRS based upon the rulesin effect at the reporting date. Thisrequirement differs from the SEC require-ment to provide three comparative years of statements of income, cash flows, and

equity. Generally, companies must apply initial adoption rules retrospectively with some limited exceptions. Any differ-ences resulting from the change inaccounting policies upon the initial adop-tion date of IFRS are recorded directly through retained earnings. Key adoptiondifferences or exceptions specific to realestate companies include:

Fair value estimates of investmentproperties at initial adoption date need tobe consistent with estimates made at thesame date under U.S. GAAP, after adjust-ment to reflect any difference in account-ing policies, unless there is objective evi-dence that those estimates were in error.Contracts, including leases, existing at thedate of adoption will require review to

determine if they contain a lease on thebasis of facts and circumstances existing ateither inception of the agreement or the

adoption date, and judgment will berequired to determine the appropriate clas-sification of leases under IFRS (no morebright line tests).

Property, plant and equipment thatpreviously did not require impairmentlosses if the undiscounted cash flows

exceeded carrying value may require write-down at adoption date if recoverable valueis less than carrying value. At initial adop-tion, a company may elect to measureproperty, plant and equipment or invest-ment property at the date of transition toIFRS at its fair value and use that fair value

as its deemed cost at that date, if the his-torical cost model is used for investmentproperty instead of fair value. Acquisitionsand business combinations prior to thedate of initial adoption do not require ret-rospective application of IFRS related tothe assets and liabilities acquired.

T H E C O N V E R S I O N P R O C E S S

Generally speaking, two approaches toIFRS conversion predominate: all-in andtiered. The former is characterized by a relatively short timeframe, simultaneousconversion of all reporting entities, dedi-cated project teams, and devotion of sig-nificant resources. The latter is conducted

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over a more extended period, with phasedconversion of reporting entities, with atleast some personnel retaining their day

job duties, and with a spreading out of project costs.

When the European Union convertedto IFRS in 2005, it was, for most compa-nies, an all-in effort driven by the tighttimelines imposed by the European regula-tors. Without the luxury of time to con-

vert on a staggered basis, most companies were forced to rush through the process,leading to inevitable inefficiencies andineffectiveness. A tiered approachstaged, rational, and measuredto IFRSconversion will likely provide betterresults. This comes with a seemingly self-

contradictory caveat: companies have toact fast if they want to go slowly. That is, if they want to reap the potential benefits of

phasing in conversion, companies may need to start almost immediately.

Companies that choose a tiered strat-egy (Figure 2) should consider staggering their conversions on a country-by-coun-try or region-by-region basis. As eachgroup moves through the stages, the

processes developed and lessons learnedare applied to the next group. Some realestate companies will choose theirCanadian subsidiaries for the first conver-sion, given Canadas 2011 mandate forconversion. Others may opt for theirEuropean entities, since they are already


2008

Awareness Assessment Planning Initial Training Roadmap

2009 10

Targeted StatutoryImplementation

System andprocess redesign

2011 12

StatutoryImplementation

Prepare IFRSopening balancesheet

Dry Runs

2013

U.S. GAAP andIFRS openingbalance sheet

InvestorCommunications

Audit Procedures

2014

Transition to IFRS Quarterly

Reporting Investor

Communications

TransitionDate

ReportingDate

Alignment with other initiatives and training for appropriate personnel

Rationalization and standardization of statutory reporting

IFRSCompetence

Figure 2: Illustrative multi-year strategy


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using IFRS for statutory accounting andtheir employees have more IFRS experi-ence. To the extent they are maintaining

dual sets of books to support U.S. GAAPreporting of the parent, this may yieldimmediate cost reductions.

Here are a few considerations forsmoothing implementation of IFRS con-version. Its a good idea to leverage existing projects. If the company is already going

throughor recently completedanenterprise resource planning or financetransformation project, now may be thetime to consider IFRS adoption. Recentversions of major enterprise resource plan-ning systems are designed to accommo-date IFRS, which can be mapped in, usu-

ally with significant cost savings.Implementation might be easier if a bite-sized approach is taken, starting witha single country or reporting entity. Useexisting reporting requirements and localcountry IFRS requirements to their advan-tage. For example, subsidiaries in countriesadopting IFRS over the next three yearsmay be good candidates for a trial run.Learn from this initial conversion exercise,and apply the lessons learned to the globalrollout down the road.

IFRS provides a compelling reason toestablish shared services centers to poten-tially consolidate dozens of local account-ing standards down to a single reporting standard. Geographically dispersed financeoffices could be drastically reduced or even

eliminated in favor of a central financefunction, strategically located to takeadvantage of tax incentives, payroll sav-

ings, and facilities cost reductions. Inmany cases, this concept is already aligned with the strategic direction real estate com-panies have taken or are currently consid-ering relative to their finance function.Since many real estate companies haveoperations located across the globe, a

decentralized structure can sometimes leadto reduced oversight and weakened con-trols. IFRS offers the opportunity toimplement standardized frameworks andprocesses to enhance the overall internalcontrol environment.

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